Japanese entities – pass-through or taxable as corporations

September 10, 2010  |  basics
Venn diagram showing tax status of Japanese entities

Venn diagram showing tax status of Japanese entities

Recent years have seen a significant expansion in the types of trusts, partnerships and corporations that can be formed in Japan.

Understanding which entities are pass-through for tax purposes, which entities are taxed as corporations and how so taxed is often very confusing.  A range of similar sounding Japanese names adds to the confusion.

The Venn diagram presented in this article is intended to help remove some of this confusion.  The diagram illustrates which entities are taxed as corporations and which apply pass through or similar treatment, shows the law under which the entity was formed and indicates whether special tax treatment applies to the category concerned.

Please also see the corporation tax basic FAQs article, the articles on tokumei kumiai (Japanese silent partnerships) and on the basics of Japanese trust taxation as well for further details.  Please see this link for a smaller version of the diagram.

For non-tax expert readers of this article, taxes are not imposed directly on a pass through entity itself  but instead on persons, normally beneficiaries, of the gains or losses arising from the activities of the entity.  A typical example of a pass-through entity is a partnership, where tax is not imposed on the partnership itself but on the partners in respect of the income of the partnership.  A pass through entity typically will not file a tax return itself or only file an information return showing how much income its taxable members should each report on their tax returns instead.

Some entities are not strictly pass-through entities themselves but are subject to a regime that achieves a tax result similar to pass-through treatment.  For example, dividends are deductible for certain SPCs provided 90% or more of distributable profis are distributed each accounting period similar to the treatment for US REITS. However the entity must still file a corporation tax return even if it has no or a very small tax liability as a result of distributing all or most of its taxable profits.

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